The yield on 10-year Italian bonds rose 28 basis points to a two-week high above 4.8 per cent after analysts warned financial markets to brace for a fresh outbreak of eurozone political turbulence.

Mr Monti has said he will step down when the country's 2013 budget passes into law, which could be as early as this month, triggering an election in mid to late February, six weeks ahead of schedule.

His announcement sent firmly into reverse the steady falls in official borrowing costs that Italy has enjoyed under Mr Monti, whose year in office has seen a turnround in investor confidence towards the country and its reform efforts. Early last week, the country's 10-year bonds were trading on yields below 4.4 per cent, the lowest for two years. Italy faced increased costs in a bond auction planned for Thursday, analysts warned.

"Markets have grown too complacent about Italy," argued Silvio Peruzzo, economist at Nomura. Jim Reid, senior strategist at Deutsche Bank, added: "One would now expect Italian risk to trade nervously until some clarity emerges as to the post election administration."

Italy's main stock market benchmark fell significantly further than its peers in opening trade. The MIB lost 3.5 per cent to 15,144.16 in Milan, against a 0.5 per cent fall on the FTSE Eurofirst 300. Intesa Sanpaolo lost 6.7 per cent to €1.1950 and Banco Popolare was 7.2 per cent weaker at €1.0590.

Spain's bond market also saw pressures mounting with the country's 10-year bonds trading up 17 basis points at yields of 5.6 per cent.

Both Spain and Italy have seen their borrowing costs fall significantly after this summer's assurances by the European Central Bank that it would act as a backstop to prevent the eurozone's disintegration.

Investors fear that Mr Monti's departure could pave the way for a possible return to power of Silvio Berlusconi, the former Italian prime minister -- although analysts noted that opinion polls suggested his chances were slim.

"We view Berlusconi's return as worrying because his most recent declarations have had a clear-anti European tone," said Nomura analysts in a note. "In particular, he has been very critical of Germany and the line of austerity imposed by the European partners on Italy and on other countries that faced a deterioration of their bond markets."

There were some hopes over the weekend that Mr Monti could be persuaded to stand in the upcoming election, triggered by the withdrawal of support for the governing coalition from Mr Berlusconi's centre-right People of Liberty (PDL), the largest party in parliament. Mr Monti, an unelected technocratic prime minister, believed the development means he no longer has a mandate to govern.

Separately, Greece extended the offer to use paper issued by the European Financial Stability Facility to buy back Athens-issued debt at a steep discount until December 11. The yield on its 10-year debt rose to 14.6 per cent.